Basic Financial Terms for Kids

For most kids, learning about money is almost like learning a foreign language.
The words will be new, and you’ll describe a way of doing things that may seem bewildering at first.

Discussions about money are likely to be your child’s introduction to the adult world. Just about every kid likes – and wants – to be treated like a grownup, or at least a big kid.
So, talk to your child as an apprentice who’s eager to learn. When you use a new term, immediately define it in clear, concise terms that are appropriate for your child’s age. Have cash, checks, credit cards and bank statements on hand to demystify things during initial discussions. Kick the new words around to be sure you’ve explained them clearly and your child understands.

Never treat your child as a babe in the woods, but limit the discussion to the basics – there’s no need to get into derivatives, hedge funds and IPOs just yet. Plan to add detail as your child grows older. Remember that one size doesn’t fit all. You must tailor the on-going discussions to your child’s age, interests and current level of understanding.

Here’s a list of basic financial terms that you’ll need when introducing your child to money:

Cash

Coins and paper bills are cash that can be exchanged for goods and services just about anywhere. When introducing the value of money, make the dollar bill your baseline. Explain that coins are fractions of a dollar, while $5, $10, $20 and $100 bills are multiples of a dollar.

Checks

Say that a check is a written instruction telling your bank to take money out of your account and to put it in the account of the person whose name you've written on the front of the check. Point to a blank check and explain that the amount to be transferred is written in numbers on the first line and in words on the second line. If your child wants more information, discuss the account and bank numbers at the bottom of the check. Underscore the importance of your signature on the check and the need to keep checks in a safe place.

Credit Cards

Credit, a promise to pay, makes sense only if you pay on time, because the bank will charge a stiff fee if you don't pay what you owe each month. Tell your child that some people overuse their credit cards, running up charges greater than they can pay in full each month. This means they must pay the bank interest (or extra money) each month resulting in less money for the things they want to do.

Credit Rating

Think of it as a report card on how you pay your bills. This is important when the bank is sizing you up for a mortgage or other loan. If you have a bad credit rating , akin to bad grades at school , the bank will be reluctant to make the loan or will charge you more for it.

Debt

Money you owe is debt. Tell your child that it's smart to keep debt low, so service charges, penalties and interest don't take money out of your pocket. However, the wise use of debt, such as a mortgage, is beneficial.

Electronic Transfer

Tell your child that a computer at your bank deducts money from your account and transfers it to a specified account at another bank. Say it's like the computer has a million fingers, making it very fast. But note that the computer will do only what it's told, and that it can't transfer the money unless you say it's okay and there's money in your account.

Mortgage

A mortgage is a loan from the bank to buy a house. It's what makes homeownership possible for millions of people. You transfer the amount of the loan to the builder or previous owner of the house and agree to pay the bank a predetermined amount, plus interest, each month. Explain why this is a wise use of debt.

Overdraft

Oops! You've written a check for more money than you have in your bank account. If you have overdraft protection, the bank will cover (or pay), the check, but for a hefty fee. This takes a bite out of your money and underscores the need to keep your checkbook up-to-date, so you don't bounce a check. "Bounce?" That means your check was returned to your account with a note saying that you didn't have enough money to cover it.

Savings Account

Here's your chance to introduce your child to the glory of compound interest; a basic tool in building wealth. Tell your child that the bank pays for the use of your money (interest) and the bank lends the money to others to build houses or to buy a new car. Make it clear that when you deposit money in a savings account, it's put to work, and therefore expands the economy. It doesn't just sit there like a piggy bank.